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PremiumPoints 3Q-2019

Posted by: Thomas F. McKeon, CFA on November 4, 2019

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In this issue we write about using the CPI as a benchmark, ponder the zero-commission mania, muse about the rise of financial pornography and comment about how free market adherents love the free markets, until competition disrupts their cash cow, then they go to work trying to confuse, distract and otherwise misled potential customers and generally subvert the free markets. We are speaking of the ascendancy of ETFs.

3Q-2019 Review & Outlook

As the chart of 3Q-2019 performance above shows, most of the asset classes we follow and use in client portfolios finished the quarter with performance plus or minus less than 2.0%. The exceptions were U.S. real estate with a 7.69% total return and emerging market stocks with a negative 4.11% return.

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CPI as Benchmark

After reading an institutional performance review recently, we decided to add the Consumer Price Index as a performance benchmark to our portfolio reporting. Read on to find out why.

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FinPorn

Sensational, misleading and unrealistic claims about investment performance seem to be on the rise. Check these out.

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Marketing Against Reality: Active Manager Obfuscation

Active management is the effort by portfolio managers to outperform a passive benchmark like the S&P 500. They have two main methodologies to accomplish this: 1-selecting a small subset of the stocks in the index they believe can outperform the broad benchmark, and 2-avoiding market downturns by going to cash before the market declines. Of course, they charge more for their services because of all the value they add through these active management efforts.

 

Except they don’t add value. They detract.

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Clothier Springs Capital Partners Update

Our partnership for direct investment in private real estate debt and equity has had its first capital event. One of our first investments—the Pines at Greenbriar—an equity investment in a 376 unit, multi-family apartment complex in suburban Atlanta, was sold at the end of September 2019. Our investment in April of 2018 was for $80,000.

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Zero Commission Frenzy

A spate of discount brokers have recently announced that they will no longer charge for online stock trades. They include Schwab, Fidelity and TD Ameritrade. On the surface, it sounds like a good thing for clients. But these businesses are not out to lose money. Online stock trades placed through an automated platform have effectively zero cost for the broker, so the brokers may be giving up a little revenue in the short-term. There are several ways they are likely to recapture that lost revenue, and at least one way that active traders may pay more, although the cost will be hard to determine.

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The Purpose of a Corporation: Beware of Pitchforks

The Statement below from the US Business Roundtable is laudable for the sentiments it expresses. After years of focusing exclusively on shareholder value as the sole focus of a corporation, the signatories now recognize that serving all of their constituencies and stakeholders may be good business.

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